WACC and Capital Budgeting Problem: Apple Inc. is trying to solve an issue with short supply and poor distribution of its latest iPhone model in the Midwest. The company is considering a new manufacturing and distribution center near the new RidgePort Intermodal facility in Wilmington, IL. The project would include acquiring land at a price of $2 million, constructing a 500,000 sf industrial building at a cost of $14 million, and the purchase of equipment for approximately $1 million. This is believed to be a relatively short-term capital project that will last only four years, as analysts expect technological advancements to speed up the automation process during this time. At the end of the project, analysts believe the land and building will sell for $15 million. The equipment will have no salvage value because it will be outdated. As a respected employee in the Company’s corporate finance department, you have been assigned to assess the project’s feasibility. Recently asking for a raise, you’ve decided to evaluate all facets of the project, from determining Apple Inc.’s WACC, to making a recommendation based on your projection of free cash flow. (Please use the timeline provided on a separate page. You are required to turn in the timeline).
WACC: a. Apple Inc.’s noncallable bonds currently sell for $1,486. They have a 10-year maturity, an annual coupon rate of 10%, and a par value of $1,000. Assuming Apple’s corporate tax rate is 40%, what is the cost of debt?
b. Apple Inc.’s preferred stock sells for $300 and it pays an annual dividend of $15. What is the company’s cost of preferred stock?
c. Apple Inc.’s common stock currently sells for $118 per share and just paid a dividend of $3.37. The future earnings, dividends, and common stock are expected to grow 5% per year. Using the DCF approach, what is the common cost of equity?
d. Using your answers from questions a. through c., and assuming Apple Inc.’s targeted capital structure consists of 55% debt, 5% preferred stock, and 40% common equity, what is the company’s WACC